Assume that the following balance sheet portrays the state of the banking system

Question

Assume that the following balance sheet portrays the state of the banking system. The banks currently have no excess reserves. What is the required ratio 5% 10% 25% 20% Suppose that the Federal Reserve (the "fed") buys $1.5 million of bonds from a bond dealer, who immediately deposits the funds in her checking account, What is the initial impact of this transaction The banking system's holding of securities rise by $1.5 million, and the banking system's total reserves fall by $1.5 million. The banking deposits rise by $1.5 million, and the banking system's holding of securities rise by $1.5 million. The banking system's holding of securities fall by $1.5 million, and the banking system's total reserves rise by $1.5 million. Checkable deposits rise by $1.5 million, and the banking system's total reserves rise by $1.5 million. As a result of the fed's purchase of $1.5 million of securities, checkable deposits in the banking system can potentially by as much as

Explanation / Answer

1. Required reserve ratio = Total Reserves/Checkable Deposits = 4/20 x 100 = 20%.

2. Option c - The banking system's holdings of securities fall by $1.5 million, and the banking system's total reserves rise by $1.5 million

3. As a result of Fed's purchase of $1.5 million of securities, checkable deposits in the banking system can potentially increase by as much as $7.5 million.
This is because the money multiplier is 1/0.2 = 5. Hence, the money stock will increae by 5 x 1.5 = 7.5

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